From Sampling to Total Population – Upgrading the Audit Paradigm
Traditional auditing calls for selecting a sample of records from the total population of records or transactions in a financial statement category. For a bank holding 100,000 mortgages, an attribute method of random sampling of mortgages might be selected. A modification of this random sampling technique might include a risk profile being applied prior to selecting the sample. (The sample might be skewed or augmented by clusters or stratum such as mortgages of a high dollar amount.)
Based on mounting pressure from regulatory agencies, investors’ demand for transparency, and an auditor’s desire to create the best audit today’s technology will allow, a new audit methodology has been created. Using a risk-oriented approach, the patented System and Method for Continuous Audit (SMCA) provides a comprehensive, cost-effective alternative to traditional methods.
At pre-determined intervals, a connection is made to the client’s accounting system and the total population of transactions is downloaded by each financial statement category. Without any sampling or selection, these transactions are analyzed to reveal the characteristics and attributes of each population. Anomalies are determined and the numerous probability analyses provide insight into how each particular population should be audited. Audit risk and audit materiality can then be determined with greater precision than traditiona, sampling and non-sampling based methods.
Audit standards must still be respected and therefore a detailed investigation of a subset of transactions is required. Based upon the multiple criteria of statistical and non-statistical anomalies identified, probability models, and the determined materiality, transactions for further scrutiny are selected. Where possible, independent analyses that simulate results by the calculations performed on the transactions that support the financial statements are conducted. A comparison is then made of the simulated results to the results reflected in the financial statements.
A risk rating is assigned for each financial statement category and the associated materiality is determined.
Key Components and Benefits:
Periodic Analyses (more frequently than just annual).
Analyses based on direct access to client’s accounting system have greater integrity than reliance on client prepared schedules.
Analyses of the total population of transactions afford greater intelligence about population characteristics and attributes than mere sampling can reveal.
Audit risk and audit materiality determinations are backed by in-depth knowledge.
The entire population of transactions is analyzed by financial statement category and this simulation of financial statements is compared to the results of the actual financial statements; a most comprehensive strategy.
This summary is the essence of Patent 7,676,427 System and Method of Continuous Assurance (SMCA). Patent 7,720,751, System and Method of Continuous Assurance – Internal Control (SMCA-IC) is essentially the same however, internal control risk rather than audit-risk is determined.
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